Sovereign, supranational and agency borrowers have found the going tough this year, especially so in dollars. However, issuers which have pitched deals at the right price have been well received. Neil Day reports.

With yields rising, swaps spreads widening and uncertainty pervading the international financial markets, 2006 never looked like it was going to be an easy year for triple-A issuers, and indeed conditions this year have been challenging from the off. Borrowers have therefore had to be on their best behaviour.

"Investors have certainly been more price conscious this year than we have seen for some time," says one head of SSA syndicate in London, "so we have seen deals coming to market more cheaply. We started off the year with the EIB's $3bn three year, which was re-offered at a good 2bp-3bp through where it had funded the year before and everything seemed to follow from that."

PJ Bye, head of frequent borrower syndicate at HSBC in London, agrees. "The big deals from the EIB, KfW and others have been priced more generously than in the past and investors have responded well to that," he says. "We have been in a bear market, but those issuers that have pitched their deals at the right price have been very well rewarded."

The EIB's issue, for example, led by Citigroup, JP Morgan and Nomura in the second week of January, was priced at 25bp over Treasuries, equivalent to 19.5bp through Libor, and offered a pick-up to its August 2008 bonds. The deal then attracted $3.8bn of demand, overcoming fears that, as had been the case on some previous occasions, the EIB's $3bn benchmark size might have proved too ambitious.

The long end of the SSA market has also proven unusually active in dollars this year. "In the dollar market we have seen a welcome extension of the yield curve," says Carl Norrey, head of JP Morgan's frequent borrower business in London. "There has been a dramatic shift along the curve in investors' preferences and this has given issuers the opportunity to explore longer maturities."

This is in spite of uncertain interest rates. "Investors have for much of the year been of the opinion that the dollar yield curve will flatten, so for relative performance they want to be further out along the curve," says Norrey, "and this has definitely encouraged the supply that we have seen."

Investors have also been enticed back into the market by the higher yields available. "We saw good demand when we saw 10 year yields breaking above resistance points," says one frequent issuer DCM official in London. "The EIB, for example, came with a 10 year in February just after Treasuries had broken above the 4.5% mark and was able to issue its first $2bn benchmark in the maturity."

Goldman Sachs, HSBC and JP Morgan led that deal.

A tale of two currencies

While issuers in dollars have generally had to pay wider levels to get successful benchmark transactions away, the opposite has been true in euros.

"Swap spreads are so much wider in euros this year than last, so arbitrage has been a lot better," says Bye at HSBC. "The basis swap going from dollars back to Euribor has also got increasingly expensive, and as SSA issuers have had to pay up more this year in dollars, the differential in funding levels between dollars and euros has gotten much narrower."

This has been generally shown by an increase in euro activity, and is evident from the behaviour of specific issuers.

In the sovereign market, for example, the Republic of Finland passed on its typical spring dollar issue, partly because of higher than expected revenues, but also because conditions were not sufficiently attractive. Its Eu5bn government bond in late May, meanwhile, attracted Eu9bn of demand despite pricing on a curve-adjusted basis of 0.5bp through Germany and a Euribor spread of minus 21.8bp. Barclays Capital, BNP Paribas, Deutsche Bank, Merrill Lynch and Nordea led the deal.

A week earlier, Spanish agency Instituto de Crédito Oficial launched a Eu1.25bn three year issue via Barclays, Dresdner Kleinwort Wasserstein and UBS that showed the narrowing of the gap between euros and dollars. Priced at 11bp through Euribor, the deal was seen as costing only 2bp-3bp more than an equivalent dollar trade, down from a 5bp, 6bp or even 7bp differential in 2005.

"There is still a gap between where we can issue in euros and in dollars," Antonio Cordero, financial markets manager at ICO in Madrid, told EuroWeek. "But the gap is narrowing and we were able to price this issue at the tightest level we have ever achieved in euros, for as long as I can remember. If this continues, we hope to have more opportunities to issue euros at attractive levels."

Other issuers that would typically have tapped the dollar market before the summer, such as Bank Nederlandse Gemeenten, have also been absent. Despite launching two Eu1.5bn benchmarks — a five year via BNP Paribas, Citigroup and UBS in January and a 10 year through Credit Suisse, HSBC and JP Morgan in June — the Dutch agency has only launched a $500m two year Eurobond via Morgan Stanley and RBC in July.

BNG, Finland and ICO all expressed the ambition to issue in dollars later in the year should conditions suit and have by no means turned their backs on the market, but DCM officials say that the dollar market is clearly no longer to be taken for granted like it has been in previous years, which is good for all involved.

"The euro market offers issuers the opportunity to access a different investor base and a much deeper one, so they can get size and a larger number of clients investing," says JP Morgan's Norrey, "so it really adds an extra dimension to the conversations we are having with issuers now."